ONS data shows increased output and narrowing of trade gap in December as economy defies

Britain’s manufacturers and construction firms enjoyed a December bounce, adding to evidence that the UK economy ended 2016 on a strong note despite the Brexit vote.

Backing up official estimates that show the UK economy was the fastest growing of the G7 leading industrial countries last year, figures published on Friday came in stronger than City economists expected.

Alongside news of the increase for construction and manufacturing output, the Office for National Statistics (ONS) also published data showing the UK’s trade gap narrowed in December as exports grew faster than imports.

The ONS estimates overall GDP grew 0.6% in the final quarter of 2016, matching the pace in the previous two quarters and suggesting the economy remained resilient to any uncertainty sparked by June’s vote to leave the EU.

The Scotiabank economist Alan Clarke said the latest data meant growth estimates for the final quarter were being revised up to 0.7%. The figures also vindicated the Bank of England’s (BoE) forecasts for the UK economy published last week, he added.

“We all thought the BoE were mad when they came out with a 2% growth forecast for this year. They may come out of this looking very smart,” said Clarke.

The consultancy Capital Economics said the figures also signalled welcome rebalancing of the UK economy away from overreliance on domestic demand and the services sector, which includes businesses such as retail and banking.

“We think that the expansion in manufacturing activity this year will exceed that in services for the first time since 2011, as the manufacturing sector gets a competitive boost from the fall in the pound, but consumer services growth is constrained by the impact of rising inflation on household spending,” it said in a research note.

The ONS said manufacturing output – accounting for about a tenth of GDP – jumped 2.1% in December, much faster than the 0.5% growth forecast in a Reuters poll of economists. Output was up 4% on a year earlier, the strongest growth since April 2014.

In the wider industrial sector, which in addition to manufacturing includes activities such as mining, output picked up by 1.1% from November, compared with a 0.2% forecast. The sector’s 4.3% year-on-year growth was the fastest since January 2011.

Other figures showed Britain’s goods trade deficit fell to £10.89bn in December, narrower than the £11.5bn forecast. But the ONS noted there was little evidence of any impact on the trade balance so far from the drop in the pound since the referendum, which makes UK exports cheaper to overseas buyers.

Finally, construction figures – covering about 6% of the economy – showed output rose 1.8% in December and 0.2% in the final quarter of 2016 – primarily a result of stronger commercial work in December and new housing work over the quarter. Economists had forecast a smaller 1% rise in output for December.

The ONS noted the pound had dropped 17% compared with a basket of other currencies between the final quarters of 2015 and 2016 but that the latest data showed “little response”, with the trade balance actually widening over the same period. It said that widening was a result of fairly large increases in the value of exports and imports – 9.8% and 11.3% respectively.

The latest figures for December will fuel hopes the UK economy was on a solid footing going into 2017, when Brexit negotiations begin in earnest. But more timely indicators suggest firms faced tougher conditions over the month of January.

A clutch of closely watched surveys last week showed companies were grappling with big increases in costs as the weak pound makes imports to the UK such as fuel, metals and food ingredients more expensive.

“While industrial production and manufacturing output has proved resilient into the end of 2016, its sustainability over 2017 is in question,” said Barclays economists Fabrice Montagné and Andrzej Szczepaniak.

They noted surveys showing inflationary pressures are at multi-year highs “which could weigh further on already bleak domestic demand” and signs that any boost to exports from a weak pound was coming to an end.

“Finally, during the the first quarter of 2017, when it is anticipated that article 50 will be triggered, we expect firms to become more cautious given the increasing likelihood of a hard Brexit following [Theresa] May’s speech on 17 Januaryclaiming the UK would leave the European single market and the EU customs union.